459
Status Quo Bias, CISG and the Future of the Common
European Sales Law
HÜSEYİN CAN AKSOY*
Abstract
Common European Sales Law (“CESL”) is not the first legal instrument directed at the formation of a uniform legal regime applicable to international commercial sales. N ot surprisingly its scope overlaps with the scope of the already existing United Nations Convention on Contracts for the International Sale of Goods (“CISG”), which is the default cross-border sales law regime in 23 European Union member states that have adopted the Convention. Unlike the CISG, the CESL has acknowledged an “opt-in” mechanism. However the studies show that when they can choose among alternatives, individuals prefer to leave things as they are. The author argues that status quo bias is a huge barrier in front of the CESL’s future success.
I. Introduction
The European Union’s desire and attempts to unify the European Contract Law dates back to a decade ago. As the last step of such attempts, on 11 October 2011 the European Commission has published its Proposal for the Regulation of the European Parliament and of the Council on a Common European Sales Law (“Proposal”).1
Common European Sales Law (“CESL”) is designated as a “second national regime” for European Union member states. It is applicable to contracts for cross-border sale of goods, digital content and related services. However it applies only if the parties of such contract expressly “opt-in”. In other words, unless the parties choose CESL as the applicable law, their contract shall not be governed by CESL.
* Dr.iur., Bilkent University Faculty of Law, Department of Civil Law; hcanaksoy@gmail.com. 1 European Commission, Proposal for a Regulation of the European Parliament and of the Council
on a Common European Sales Law, COM(2011) 635 final, 2011/0284 (COD) <http://eur-lex.europa.eu/
LexUriServ/LexUriServ.do?uri=COM:2011:0635:FIN:EN:PDF> accessed 11 February 2012. Following the finalization of the Draft Common Frame of Reference, questions arose whether this would lead to a Common Frame or Reference, or not. It was even argued that the entire plan was a failure. However in the middle of such criticisms, a Committee of Experts have been formed to simplify and narrow down the subject matter. On 3 May 2011 the Committee published a Feasibility Study, which was soon revised and turned out in to a proposal for unification of the sales law within the EU. Ewoud Hondius, Towards
The scope of the CESL covers both business-to-business (“B2B”) contracts and business-to-consumer (“B2C”) contracts. However, CESL is not the first legal instru-ment directed at formation of a uniform legal regime applicable to international com-mercial sales. Not surprisingly its scope overlaps with the scope of the already existing United Nations Convention on Contracts for the International Sale of Goods (”CISG” or “Convention”), which only covers B2B contracts.
Although the CISG does not apply to consumer sales, it also regulates commercial sales. In other words, both the CISG and the CESL set forth provisions, which shal apply to cross-border B2B transactions. Within this context, such intersection between the scopes of these two instruments makes them competitors. However in contrast to CESL, CISG acknowledges an “opt-out” mechanism and it applies to the contracts within its scope, unless the parties agree otherwise.
Twenty-three out of 27 European Union (“EU”) member states have adopted the CISG. Therefore, currently for most of the businesses within the EU, the default regime for international sale of goods contracts is the CISG. In such countries, the CESL can beat its competitior CISG only if the parties explicitly opt-out of the CISG and opt-in for CESL. However the studies show that individuals are biased for the status quo and when they can choose among alternatives, people prefer to leave things as they are.
This study aims to analyze the possible effects of the CESL’s “opt-in” mechanism on the likely success of the CESL against its competitor CISG, which has accepted an “opt-out” mechanism.
II. Comparison of Purposes and Scopes of CESL and CISG
A. Purpose and Scope of CESL
The European Commission has proposed the CESL as a “second national regime”2
for cross-border sale of goods, digital content and related services between EU member states. In the Explanatory Memorandum of the Proposal, the overall
objec-2 As explained in the Explanatory Memorandum of the proposal, a choice of the CESL is not a
choice of the applicable law within the meaning of private international law rules. It is a choice between two different sets of sales law within the same national law. Such regulation of the CESL arises from the necessity to comply with Article 6 of The Rome I Regulation. Regulation 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I [2008] OJ L 177/6, art 6. Accordingly, in cross-border transactions between a business and a consumer, parties cannot choose an applicable law, which grants less consumer protection than the consumer’s national law. Since the CESL is regulated as a second national law, the level of the mandatory con-sumer protection of the laws of the concon-sumer’s country cannot be claimed to be higher than the CESL. Because the CESL will be the second national law in all EU member states including the consumer’s country and the country, whose law has been chosen. European Commission (n 1) 6. According to Low, by injecting the CESL within national legal systems and next to the national rules, the national rules are paradoxically both changed and unchanged. The author describes this as “harmonisation without harmonisation”. Gary Low, A Numbers Game – The Legal Basis for an Optional Instrument in European
tive of the Proposal is explained as the need “to improve the establishment and the functioning of the internal market by facilitating the expansion of cross-border trade for business and crossborder purchases for consumers”. According to the European Commission:
Differences in contract law between Member States hinder traders and consum-ers who want to engage in cross-border trade within the internal market. The obstacles which stem from these differences dissuade traders, small and medium-sized enterprises (SME) in particular, from entering cross border trade or expanding to new Member States’ markets. Consumers are hindered from access-ing products offered by traders in other Member States.
Article 3 of the CESL regulates the scope and the optional nature of the instrument. Accordingly, it is set forth that the parties may agree that the CESL governs their cross-border contracts for the sale of goods, for the supply of digital content and for the provision of related services. However the CESL may be used only if the seller of goods or the supplier of digital content is a trader.
The CESL covers both B2C and B2B contracts. In other words, it applies to con-sumer contracts in addition to commercial sales contracts. Where all the parties to a contract are traders, the CESL may be used if at least one of those parties is a small or medium-sized enterprise (“SME”).3
B. Purpose and Scope of the CISG
Similar to the CESL, the CISG is directed at the adoption of uniform rules which govern contracts for the international sale of goods and the removal of legal barri-ers in international trade and promotion of the development of international trade. It has been in effect since 1988. However unlike CESL, it is designated as an international instrument, rather than establishing a legal regime solely within Europe.
According to Article 1, CISG applies to commercial sales contracts, where parties have places of business in two different states, and both states have ratified the Con-vention or w hen the rules of private international law lead to the application of the law of a contracting state. In such cases, the CISG becomes the default regime for
Contract Law, Maastricht European Private Law Institute Working Paper 2012/2 at 11 (2012) at <http://
papers.ssrn.com/sol3/papers.cfm?abstract_id=1991070> accessed 18 March 2012.
3 Art. 7/2 of the CESL describes an SME as follows:
“For the purposes of this Regulation, an SME is a trader which
(a) employs fewer than 250 persons; and
(b) has an annual turnover not exceeding EUR 50 million or an annual balance sheet total not exceeding EUR 43 million, or, for an SME which has its habitual residence in a Member State whose currency is not the euro or in a third country, the equivalent amounts in the currency of that Member State or third country.”
international sale of goods contracts. However consumer contracts are outside the scope of the CISG.
In contrast to CESL, CISG has acknowledged an opt-out mechanism. This means that it applies, unless the parties explicitly choose not to apply the CISG to a contract that falls within the scope of the Convention. Within this scope, parties are free to opt-out of the CISG entirely or only partly.4
C. Overlap between CESL and CISG
As of March 2013, the CISG has been adopted by 79 member states including most of the EU members. 23 out of the 27 member states of the European Union are contracting states to the Convention.5 Therefore, for most businesses within the EU,
currently the default regime for international sale of goods contracts is the CISG. Since CESL also regulates cross-border contracts for commercial sale of goods, this clearly shows that the European Commission is not satisfied with the Conven-tion.6
Considering that the CESL and CISG cannot apply at the same time, in the recitals of the Proposal, the European Commission has set forth that:
Where the United Nations Convention on Contracts for the International Sale of Goods would otherwise apply to the contract in question, the choice of the Com-mon European Sales Law should imply an agreement of the contractual parties to exclude that Convention.
In other words, when the parties opt-in for the CESL, this will constitute an auto-matic opt-out of the CISG.7 However an opt-out from the CISG shall not be
regarded as a direct opt-in for the CESL.
4 Art. 6 of the CISG sets forth that “The parties may exclude the application of this Convention or,
[…] derogate from or vary the effect of any of its provisions.”
5 Remaining four member states are United Kingdom, Portugal, Ireland and Malta.
6 In fact in the Explanatory Memorandum of the Commission’s proposal, justification has been
given for a derogation from the CISG as follows “The Vienna Convention regulates certain aspects in contracts of sales of goods but leaves important matters outside its scope, such as defects in consent, unfair contract terms and prescription. Further limitations to its applicability arise as not all Member States have signed the Vienna Convention and there is no mechanism which could ensure its uniform interpretation”. European Commission (n 1) at 5.
7 It must be underlined that whether and to what extent the parties have opted-out of the CISG
shall be determined by the CISG itself, as the law applicable to the contract. Therefore, the above-indicated statement of the Recital that the choice of the CESL should imply an agreement to exclude the Convention, seems ultra vires. Martijn W Hesselink, How to Opt into the Common European Sales
Law? Brief Comments on the Commission’s Proposal for a Regulation Centre for the Study of
Euro-pean Contract Law Working Paper Series 2011/15 at 4, (2011) at <http://papers.ssrn.com/sol3/papers. cfm?abstract_id=1950107&> accessed 20 May 2012. The author advises that in B2B transactions, if the parties opt-in for the CESL, they should indicate explicitly that they are also opting out of the CISG, and especially in case of a partial choice, they should be very precise about their intentions. Ibid. n 5.
III. Status Quo Bias and the Opt-In Mechanism of the CESL
A. Status Quo Bias, Loss Aversion and Regret Theory
Studies show that when they can choose among alternatives, individuals prefer to leave things as they are. In other words, rather than the alternative, individuals display a bias towards sticking with the status quo.8 Such tendency is named as
“status quo bias”.
Status quo bias is an implication of loss aversion, which “implies that the impact of a difference on a dimension is generally greater when that difference is evaluated as a loss the same difference is evaluated as a gain”.9 In simpler terms, this means
that indivuduals care about losses more than they care about gains. A certain amount of gain gives us less pleasure than the amount of misery that the same amount of loss would give. Therefore, people prefer to avoid losses than to acquire gains.10
The status quo is a neutral reference point and decision makers perceive alternative behaviours as gains or losses in relation to such reference point. In other words, util-ity is not acquired from the states of wealth or welfare, but it is basically changes relative to a natural reference point, i.e., status quo.11 Since individuals always tend
to avoid losses, they have a strong tendency to remain at the status quo. Because dis-advantages of leaving such reference point appears to be larger than its dis-advantages.12
Why are people loss averse? The regret theory gives an answer to such question.13
According to the regret theory, the decision makers fear that they will regret their decisions. Therefore in order to minimize the possibility of such regret, they refrain from leaving the status quo. In other words, they prefer not to act at all.14
Psychological studies show that “anticipation of regret over actions that yield
disappointing results is usually stronger than the anticipation of rejoicing over
actions that yield desirable results”.15 Within this scope, individuals’ regret from
undesirable consequences of their actions is greater than undesirable consequences they face from inaction.16 Therefore, when deciding of a risky behaviour, which can
either be profitable or not, people prefer not to choose the change.17
8 William Samuelson and Richard Zeckhauser, Status Quo Bias in Decision Making 1 Journal of
Risk and Uncertainty 7, 47 (1988).
9 Amos Tversky and Daniel Kahneman, Loss Aversion in Riskless Choice: A Reference-Dependent
Model 106 The Quarterly Journal of Economics 1039, 1040 (1991).
10 Daniel Kahneman, Jack L Knetsch and Richard H Thaler, Anomalies: The Endowment Effect,
Loss Aversion, and Status Quo Bias 5 The Journal of Economic Perspectives 193, 197–198 (1991).
11 Ibid. at 199. 12 Ibid. at 197–198.
13 Russell Korobkin, The Status Quo Bias and Contract Default Rules 83 Cornell Law Review
608, 657 (1998).
14 Russell Korobkin, Behavioral Economics, Contract Formation, and Contract Law in Cass R
Sunstein (ed), Behavioral Law and Economics 133 (Cambridge University Press 2003).
15 Ibid. at 132–133. 16 Korobkin (n 13) at 657. 17 Korobkin (n 14) at 130.
B. Likely Effects of Status Quo Bias on the Future of CESL
The legal order consists of default rules and mandatory rules. By setting default rules, the lawmaker makes a risk allocation and establishes a balance of interest between the parties. Unlike mandatory rules, the parties to a contract are entitled to change the default rules, which govern their contract.
The default rules that govern the parties’ contract might be perceived by the parties to represent the status quo allocation of rights and responsibilities.18 Therefore, when
all other things are equal, the parties perceive the default rules as a part of the status quo and prefer them to other alternatives. As a result, they prefer to choose the default option rather than opting-in for an alternative.19 This is basically related with the
above-explained regret theory. To be more specific, parties that change the default rules, which govern their contract might feel more regretful if their actions turn out to be unprofitable than other parties who inertly accept the status quo rules.20
From this approach it can be argued that in the 23 EU member states that have adopted the CISG, the CISG is the status quo. This is naturally caused by the fact that CISG has accepted an opt-out mechanism. Because such binding feature of the CISG makes it the default regime for international sale of goods contracts in the signatory states. In other words, the CISG applies unless the parties explicitly choose not to apply the Convention. As a result, the opt-out mechanism makes the CISG “status quo” against the CESL.
A choice to opt-in for the CESL and opt-out of the CISG is a risky behaviour, which can either be profitable or not. As a matter of fact, an ordinary trader would be aware that a choice of law shall have very important results. However such trader would have limited knowledge of the provisions and legal results of choosing either of the CISG or the CESL. Therefore making a choice between any of the two instru-ments can either be profitable or not. Due to the risks of making a choice bears, the status quo bias would lead the traders not to act.
At this point it might be useful to refer to two very important findings of the stud-ies conducted by Samuelson and Zeckhauser regarding status quo bias. First of all their studies showed that an alternative becomes significantly more popular when it is designated as the status quo.21 In other words, if a certain option is presented as the
status quo, people have higher tendency to choose it. If the same option is described as an alternative situation against the status quo, it becomes less popular. Despite being an opt-out instrument, the CISG has always been an alternative to the national laws of the contracting parties. Therefore it was weaker against the national laws and
18 Korobkin (n 13) at 631.
19 Nattavudh Powdthavee, Behavioural Economics and Public Policy: Lessons for Effective and
Efficient Developmental Schemes at 3, <http://www.powdthavee.co.uk/resources/Behavioural_Econom
ics_and_Public_Policy.pdf> accessed 18 February 2012.
20 Korobkin (n 14) at 132.
the choice of law by the parties. However since the CESL is shown as an alternative to the CISG, it will now upgrade the CISG to the position of status quo.
Second finding of Samuelson and Zeckhauser was that the status quo effect increases with the number of alternatives.22 This means that introduction of the CESL
will even strengthen status of its competitior, the CISG, in the legal market. In fact, the CESL has provided another alternative for the contracting parties, who could already choose between law to be chosen, the national law, and the CISG. Moroever it should be noted that a decision to opt-in for the CESL is not a single decision. Although the CESL rules that an in for the CESL automatically results in an opt-out of the CISG, such action still consists of two decisions. In other words, prior to opting-in for the CESL, the parties actually decide firstly to opt-out of the CISG and than to opt-in for the CESL. Within this process, after deciding to opt-out of the CISG, at the second stage the parties compare the CESL to other alternatives so that they can choose the legal regime to govern their contract. The necessity to make two deci-sions, rather than one, increases the risk attributed to change. Therefore loss aversion and regret theory would halt the decision-maker from choosing the alternative behav-ior to the status quo. When it is also considered that the parties are entitled to partly opt-out of the CISG, the range of possible decisions/alternatives further increases. This is another factor, as stated by Samuelson and Zeckhauser, which increases the status quo effect.
Lando has also successfully exhibited that past experiences in relation to opt-in instruments have been failures. Firstly, when adopitng the Conventions on the Uni-form Sales Laws of 1964, the British ratified the Conventions on an opt-in basis. The practice shows that a choice to opt-in was hardly ever made. Secondly, despite being legal intruments which may be applied by tribunals as the governing law, only in very rare cases PICC and PECL have been chosen as the governing law.23
IV. Conclusion
The CESL has acknowledged an opt-in mechanism. This means that provisions of the CESL shall apply only when the parties to a contract expressly choose the CESL. However its competitor CISG, which is in effect since 1988 has accepted an opt-out basis. This makes the CISG “status quo” against the CESL.
Opting-out of the CISG and opting-in for the CESL is a risky behaviour, which can either be profitable or not. In such cases, the status quo bias prevents the decision maker to act for a change. Therefore it is quite difficult to argue that the European merchants will opt-in for the CESL in their commercial sale of goods contracts. As long as the CESL reserves the opt-in mechanism, status quo bias shall be a huge bar-rier in front of the CESL’s future success.
22 Ibid. at 19.
23 Ole Lando, Comments and Questions Relating to the European Commission’s Proposal for a
